What's Next

A Virtual Cash Register Rings Up Tiny Transactions

By ANNE EISENBERG

Published: January 7, 2004

THE early days of Internet commerce offered many promises, none of them brighter than the chance for people to set up Web sites and sell inexpensive digital goods like songs, articles and photos.

But most of the pioneering companies that devised transaction systems for low-cost online purchases faded away, dogged not only by the giveaway ethos of the Internet but also by cumbersome technology and fees that ate up the profit on items that often sold for less than a dollar.

Times have changed, though, and electronic micropayment systems may yet be born again.

In the past few months, several new companies dedicated to processing small cash transactions on the Web have introduced commercial services, and some older companies, including one inspired by Apple's huge success in selling 99-cent songs at its online music service, have modified their offerings to accommodate some lower-priced sales.

This time around, innovative technology may make the difference for the micropayments market. For example, two highly regarded scientists at the Massachusetts Institute of Technology have founded a company that they say has the technical expertise to let people sell digital content profitably on the Web for prices as low as pennies.

Ronald L. Rivest, the R in the public key encryption system RSA, which he helped invent, and Silvio Micali, whose honors include the 1993 Gödel Prize in theoretical computer science, founded Peppercoin (www.peppercoin.com) and introduced it commercially in December. Peppercoin hopes to reduce online merchants' transaction costs substantially, particularly the number of credit card charges they pay. These are typically about 25 cents per sale, said Robert W. Carney, vice president for marketing at Peppercoin.

The company's software uses advanced encryption and mathematical models to avoid charging a seller a fee each time an item is sold. Instead, the system statistically selects a representative sample of the transactions for billing.

For example, the software might randomly select one sale of a $1 song from among 20. It multiplies this one sale by 20 to represent the other 19 sales, and passes along $20 to the seller. But by lumping the sales together, only one transaction fee, not 20, is charged.

"Would you prefer to be paid $1 minus a 25 cent transaction fee each time you make a sale," Dr. Micali asked, "or zero dollars 19 times and $20 minus a 25-cent transaction fee once?"

Algorithms that were developed and refined over the past 20 years are used for the process, Dr. Rivest said. With a large volume of transactions, the errors that derive from the sampling are negligible.

One of the companies Peppercoin has signed up is Smithsonian Folkways Recordings of Washington, which is about to begin offering individual tracks from 33,000 folk recordings for sale electronically. Richard Burgess, director of marketing, said that the organization was comfortable with Peppercoin's complex algorithms. "Probability cuts down on the number of transaction fees," he said, but "there's no probability attached to the purchases - we know who bought what."

Thomas Frey, executive director of the DaVinci Institute, a research organization in Louisville, Colo., recently sponsored a seminar on micropayment systems. While such systems failed in the past, he said, their future now seems brighter. "Having people like Ron Rivest solving problems opens the door for interesting things to happen," he said.

Dr. Frey predicts that one day people might buy low-cost items ranging from ring tones for their cellphones to weapons upgrades for their video games. "They could even buy cool sunglasses and new hairdos for their avatars," he said.

BitPass, another new micropayment company, stresses the simplicity of its system. Kurt Huang, chief executive of the company, based in Palo Alto, Calif., said that all the gatekeeping and financial processing services were bundled in a single file that can easily be uploaded to a Web server for use by a hosted Web site. "This way the little guy can engage in digital commerce," Mr. Huang said.

Larger businesses, too, are trying out BitPass. Clear Channel Radio tested the system, said Joe Cunningham, the vice president and market manager for the company, offering downloadable content like digital images, sold at 10 cents each, and videos of backstage activity at concerts for 50 cents.

"It's an easy chance to monetize some things we wouldn't offer for free," he said.

But profits measured in the pennies of micropayments are problematic to Walter Nirenberg, the vice president for sales at Yaga, a San Francisco company that handles online payments for archival contents at many companies, among them Time .com. "No merchant is going to meet their revenue goals with micropayments," he said.

"We see them as an e-commerce enabler," he added, so that a merchant can offer the option and never say no to a transaction because of its size. "But if your entire business were predicated on them," he said, "you'd have a microbusiness."

Others, too, see hurdles for the newly reawakened field of micropayment, no matter how elegant the technology that enables it. Sandy Thaw, the product director for the emerging consumer environments group at Visa International in San Francisco, said that reduced fees alone would not make the new micropayment businesses successful. "Their focus is on minimizing the processing costs," he said. But to be successful, he pointed out, the companies will also have to deal with substantial additional costs to promote their brand and services to get them into the hands of consumers and merchants.

Yet Todd Pearson, the managing director for merchant services at PayPal, an eBay subsidiary in Mountain View, Calif., that is the principal peer-to-peer system for paying online, said the time for micropayments had finally arrived. "We think the stars are coming into alignment on this at last," he said.

PayPal recently offered a special micropayment rate, restricted for now to large digital music providers. These sellers will be charged 11.5 cents for a 99-cent song - 2.5 percent plus 9 cents per transaction - rather than the standard 25 to 30 cents.

"We think the whole marketplace is going to take off and involve digital movies as well as lots of people trying to monetize contents they created," he said.